G-20 set to press Europe over crisis firewall

Euro debt crisis, IMF resources among main issues for G-20 meeting

By

PolyaLesova

NEW YORK (MarketWatch) — European officials heading to Mexico this weekend will face strong pressure from other Group of 20 members to boost the euro zone’s firewall against the sovereign debt crisis that’s plaguing the region and endangering the global economy.

The European crisis will be at the top of the agenda for the G-20 finance ministers and central-bank governors who will gather in Mexico City on Saturday and Sunday. While the approval of the second rescue package for Greece and the liquidity measures taken by the European Central Bank have eased some market tensions, the G-20 will insist that the euro zone needs to commit more financial resources to its rescue funds to stem contagion to other debt-laden countries such as Italy and Spain.

“The G-20 will use this opportunity to escalate pressure on the European members in terms of erecting a regional firewall around the euro area,” said Domenico Lombardi, a senior scholar at the Brookings Institution.

“No significant decision will be taken, but it will be an opportunity for non-European members of the G-20 to [...] urge the Europeans to fill the still considerable gaps in their own policy response to the crisis,” he said.

Europe gets stern warning from G-20

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WSJ's Sudeep Reddy reports from the G-20 Summit in Mexico City that European leaders have received pressure to expand bailout programs similar to that approved for Greece this week.

The G-20 meeting comes ahead of next week’s summit of European Union leaders, where they are expected to discuss the adequacy of the euro-zone rescue funds. Some observers are urging the euro area to combine its temporary and permanent bailout funds in order to provide a safety net amounting to around 750 billion euros ($1 trillion). Key in such an effort will be the position of Germany, Europe’s biggest economy.

A related issue is the call from the International Monetary Fund’s chief to raise the institution’s lending resources by $500 billion. Euro-area members said in December that they were considering providing up to €200 billion ($270 billion) to the IMF in the form of bilateral loans. During the euro crisis, the IMF has worked with the EU to provide assistance to financially strapped countries such as Greece, Portugal and Ireland.

However, Lael Brainard, a senior U.S. Treasury Department official, made it clear this week that the G-20 will not decide on increasing IMF resources until after euro-zone officials agree on bolstering their own rescue funds. The IMF, she said, cannot be a substitute for a credible European response and it’s important that the euro-area firewall is “fully operational.”

“The message is that the Europeans have to do the first and meaningful move by erecting their regional firewall, by providing the IMF with additional resources and only then the other members of the G-20 will provide additional resources to the IMF,” Lombardi said.

While the U.S. is not expected to contribute more money to the IMF, some likely contributors include China, Japan and Saudi Arabia, he noted.

The G-20 is composed of 19 countries and the European Union, which all together make up around 90% of global gross domestic product. Major advanced and emerging economies are represented in the group, including the U.S., China, Japan, Russia, Brazil, India and Saudi Arabia.

”To the extent that a crisis in Europe threatens the world economy, it is in the self-interest of the G-20 to assist Europe,” said Marc Chandler, global head of currency strategist at Brown Brothers Harriman. “Europe is the largest destination of Chinese goods and the slowing of exports to Europe is already evident in the data.”

The global economic outlook will be high on the G-20 agenda this weekend. Besides the impact of the euro crisis, officials will assess the risks posed to the economy by the rise in oil prices. Crude-oil futures on the New York Mercantile Exchange traded above $109 a barrel Friday on concerns over Iran’s nuclear program and potential supply disruptions.

Also at the G-20 meeting, there may be informal discussions on selecting a successor for Robert Zoellick as World Bank president. Zoellick announced earlier this month that he will step down at the end of his five-year term on June 30. The Washington, D.C.-based institution gives financial assistance to developing countries. Under an informal arrangement, an American is traditionally selected as World Bank chief, while a European heads the IMF.

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